Business Valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. All too often, shareholders, directors and/or partners in a business do not have any formal agreements and so, when they fall out, valuing the business becomes very difficult as there are no pre-agreed terms of reference.
If it is a limited company, should one remove the (very low) directors’ remuneration and replace it with a market value remuneration prior to calculating the buyout value?
What expenses have the parties agreed to put through the company that would not normally be treated as valid business expenses? Do they have spouses on the payroll that do not genuinely earn their salaries? Should these be added back? Do they work from home and would this be necessary for the new owners?
Is their business repeat business or do they suffer from high marketing costs to enable them to find new clients? In the direct marketing business up to 30% of overheads can be marketing. Are they professionals and so liable to keep repeat business and reduce their overhead costs?
The type of business – professional or commercial – will affect the multiplier for the basis of valuation. In the case of accountants, it is the repeat client value that is used to calculate the valuation from 1.00% to 1.25% of client value. Yet for many commercial enterprises it will be the amended net profit with a multiplier of between four and eight.
The most common requirement for a valuation is in a matrimonial dispute where the shareholding partner usually wishes to materially down value the business whilst their spouse is equally keen to over value it. In those circumstances, one would need to look at an open market valuation of the business.
Finally, the business may also have properties which would need to be separately valued and then consolidated into the overall business valuation.